Committee Independence and Financial Institution Performance during the 2007-08 Credit Crunch: Evidence from a Multi-country Study

Abstract

Manuscript Type: Empirical Research Question/Issue: Using the data of the 20 largest financial institutions from G8 countries, we explore whether the performance is higher for financial institutions with more independent directors on different committees during the 2007-08 financial crisis. We also examine the moderating effect of a country-level civil law dummy and firm-level excessive risk-taking behaviors on the independence-performance relationships. Research Findings/Insights: The empirical evidence shows that the performance during the crisis period is higher for financial institutions with more independent directors on auditing and risk committees. The influence of committee independence on the performance is particularly stronger for civil law countries. In addition, the independence-performance relationships are more significant in financial institutions with excessive risk-taking behaviors. Theoretical/Academic Implications: Our findings complement existing works to partially resolve the independence-performance relationship controversies by exploring the independence of different committees. The moderating effects of civil law countries and excessive risk-taking firms further address the governance environment's role in the effectiveness of director independence. Practitioner/Policy Implications: Our results provide important policy implications for financial institutions. The regulation authorities should enhance regulation compliance to improve director independence, particularly for auditing and risk committees in banking industry. Independent directors in the banking industry are supposed to put more emphasis on excessive risk-taking behaviors, as the financial institutions profit from risk-bearing earnings.